1. The Economic Environment
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2. Chapter Objectives
Learn differences among the world’s major economic systems
Learn criteria for dividing countries into economic categories
Discuss economic issues that influence international business
Assess the transition process for market economies
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3. Economic Issues for International Businesses
What type of economic system does the country have?
What is the size, growth potential, and stability of the market?
Is the company’s industry in that country’s public or private sector?
If public, does the government allow private competition?
If private, is it moving towards public ownership?
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4. Economic Issues for International Businesses, cont
Does the government view foreign capital as competition with or in partnership with public or local private enterprises?
How does the government control the nature and extent of private enterprise?
How much of a contribution is the private sector expected to make in assisting the government formulate overall economic objectives?
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5. Key Economic Forces General economic framework
Economic size and stability
Existence and influence of capital markets
Factor endowments
Indicators
Growth
Inflation
Surpluses
Deficits
Economic transitions
Availability of economic infrastructure
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6. Economic System
Structure and processes that a country uses to allocate its resources and conduct commercial activities.
Connection between political ideology and economic systems
Countries where individual goals are given primacy free market economic systems are fostered
Countries where collective goals are given primacy there is marked state control of markets

7. Economic Systems
Market economy: what is produced & in what quantity is determined by supply/demand and signaled to producers through a price system
Command economy: planned by government
Mixed economy: a balance of both of the above

8. Economic Systems Laissez-Faire Economics
Market Economy: resources are primarily owned and controlled by the private sector, not the public sector
Consumer sovereignty is the right of consumers to decide what to buy
Companies have the ability to decide what to produce and in which market to compete
Prices are determined by supply and demand
Laissez-Faire Economics
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9. Government Role in Market Economy
Preserving Property Rights
Enforcing
Antitrust Laws
Providing a Stable Fiscal & Monetary Environment
Preserving Political Stability

10. Enforcing Antitrust Laws
The goals of antitrust (or antimonopoly) laws is to encourage the development of industries with as many competing businesses as the market will sustain

11. Preserving Property Rights
By preserving and protecting individual property rights, governments encourage individuals and companies to take risks such as investing in technology, inventing new products, and starting new businesses.

12. Providing Stable Fiscal & Monetary Environment
Encourages commerce in a nation because it improves its reputation as a place to do business
To reduce high inflation and unemployment, governments can help control inflation through effective fiscal policies (policies regarding taxation and government spending) and monetary policies (policies controlling money supply and interest rates).

13. Preserving Political Stability
A market economy depends on a stable government for its smooth operation and, indeed, for its future existence.
Political stability helps businesses engage in activities without worrying about terrorism, kidnappings, and other political threats to their operations.

14. Command Economy (Centrally Planned Economy): all dimensions of economic activity, including pricing and production decisions, are determined by a central government plan
Government owns and controls all resources
Prices are determined by government
Welfare of the group is paramount
Economic and social equality is the goal
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15. Decline of Central Planning
Central planning failed to:
Create economic value
Provide incentives
Achieve rapid growth
Satisfy consumer needs

16. Mixed Economy: Some degree of government ownership and control
The goal is to achieve low unemployment, low poverty, steady economic growth and equitable distribution of wealth.
No economy is purely market or command
Economic systems are along a spectrum of freedoms
Most command economies are moving towards a market economy
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17. CLASSIFICATION OF THE COUNTRIES
Countries Classified by Economic System
Economic system—based on government’s mix of ownership and control of the economy
Ownership—who owns the resources engaged in economic activity
Most countries are a mixture of public and private ownership
state-owned enterprises—ownership by public sector
Most countries with significant state-owned enterprises are moving toward less, not more, public ownership
privatization

18. Factor Conditions Inputs to the production process
Human resources
Physical resources- weather, existence of waterways, availability of mineral and agricultural products
Knowledge - research and development
Capital - availability of debt and equity capital
Infrastructure - roads, port facilities, energy, and communications
Factor conditions are especially critical for the production of goods
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19. Demand Conditions Market potential
Composition of home demand (nature of buyer needs)
Size of home demand
Growth of home demand
Internationalization of demand
Demand conditions are especially critical for market-seeking
investments
Combination of factor and demand conditions contribute to the location—specific advantage that a country has to offer domestic and foreign investors
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20. Economic Development
Economic well-being of one nation’s people relative to another nation’s people
Economic output (agricultural,
industrial, service)
Infrastructure (communications,
transportation, power)
People (physical health,
education level)
Productivity is key
Ratio of outputs (that created)
to inputs (resources used to create output)

21. Differences in Economic Development
Different countries have dramatically different levels of economic development
Two common measurements of economic development
Gross National Income (GNI) superseded Gross National Product or GNP
Purchasing Power Parity (PPP) which accounts for differences in the cost of living

22. Gross National Income Tool to measure one country against another
Size
Demand
Gross National Income (formerly the Gross National Product)
GNI is the market value of final goods and services newly produced by domestically owned factories of production.
Countries with high populations and high per capita GNI are most desirable in terms of market potential
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23. Gross Domestic Product
GDP: the value of production that takes place within a nation’s borders, without regard to whether the production is done by domestic or foreign factors of production
Example -
Both a Ford and Toyota manufactured in the United States counts towards our GDP
A Ford produced in Mexico would not
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24. Importance of Per Capita GNI
Low Income
755 or less (in 2000)
Developing/Emerging Country
High Income
9,266 or more
Developed/Industrial Country
Upper Middle Income
2,996-9,265
Middle Income
756-9,265
Lower Middle Income
756-2,995
World Bank Category
Per Capita GNI ($)
Common Name
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25. One common measure of economic development is a country’s gross national income per head of population. GNI is regarded as a yardstick for the economic activity of a country; it measures the total annual income received by residents of a nation (GNI superseded gross national product, or GNP). Map 2.1

26. World bank
multilateral lending institution that provides investment capital to countries
Uses per capita GNP as a basis for lending policies
Goal is to provide development assistance
Build infrastructure, promote economic growth and stability, improve quality and quantity of demand

27. Purchasing Power Parity
PPP is the number of units of a country’s currency required to buy the same amounts of goods and services in the domestic market that $1 would buy in the United States
PPP is a useful measure since it accounts for international differences in price
Example: China has a higher PPP than Japan
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28. Differences in Economic Development: Purchasing Power Parity
Country
GNI per Capita
GNI PPP per Capita
GDP Growth Rate
(%)
Brazil
$2,710
$7,480
2.6%
China
$1,100
$4,990
9.3%
Germany
$25,250
$27,460
1.2%
India
$530
$2,880
6.1%
Japan
$34,510
$28,620
Nigeria
$320
$900
3.1%
Poland
$5,270
$11,450
4.8%
Russia
$2,610
$8,920
0.1%
Switzerland
$39,880
$32,030
0.9%
United Kingdom
$28,350
$27,650
2.8%
United States
$37,610
$37,500
3.2%
As can be seen, there are striking differences in the standard of living. Table 2.1 suggests that the average Indian citizen can afford to consume only 7.7 percent of the goods and services consumed by the average U.S. citizen on a PPP basis.

29. Big Mac index
The Economist's Big Mac index is based on the theory of purchasing-power parity (PPP),
the idea that exchange rates should move to equalize the prices of a basket of goods and services across different countries. Our basket is the Big Mac.
For example, the cheapest burger in the chart is in China, at $1.26, compared with an average American price of $3. This implies that the yuan is 58% undervalued relative to its Big Mac dollar-PPP. On the same basis, the euro is 25% overvalued, the yen 17% undervalued.

31. Economic Factors International Businesses Must Address
Economic Growth
Inflation
Surpluses
Deficits
Balance of Payments
External Debt
Internal Debt
Privatization
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32. Key Macroeconomic Issues Affecting Business Strategy
Global economy can affect company profits and operating strategies
Management must learn to scan the environment
Economic growth
There are significant differences in growth
rates worldwide
Affects the degree to which investments in or sales to a country can affect the bottom line of a company
drop in economic growth can have detrimental effects on investments
new investors reluctant to bring in money
existing investors forced to cut back operations and may pull out
Difficult to forecast economic growth

33. Key Macroeconomic Issues (cont.)
Inflation—a condition in which aggregate demand grows faster than aggregate supply
Inflation rate—the percentage increase in the change in prices from one period to the next
Consumer price index (CPI)—index of inflation
measures a fixed basket of goods and compares its price from one period to the next

34. Key Macroeconomic Issues (cont.)
External deficit— country’s cash outflows exceed its inflows
Balance of payments—record of a country’s international transactions
current account—comprised of:
trade in goods and services and income from assets abroad
merchandise trade balance—country’s trade deficit or surplus
exports considered to be positive
imports considered to be negative
Services—transactions such as travel, passenger fares, other transportation
income receipts—payments on assets
unilateral transfers—government and private relief grants and income transferred by guest workers

35. Key Macroeconomic Issues (cont.)
Balance of Payments (cont.)
Capital account— transactions in real or financial assets between countries
transactions include foreign direct investments
Companies monitor the balance of payments to watch for factors that could lead to currency instability or government actions to correct an imbalance
External debt—results from borrowing money abroad
Measured in two ways
total amount of the debt
debt as a percentage of gdp
The greater the external debt, the more unstable the economy
Countries with small market conditions and political instability must rely on external debt

36. Key Macroeconomic Issues (cont.)
Internal debt— result of an excess of government expenditures over revenues
Internal deficits—excess government expenditures over tax receipts
deficits result from:
poorly run tax system that fails to collect all the revenues due
expensive government programs
state-owned enterprises operated in the red
Privatization—the sale of state-owned enterprises to the domestic or foreign private sector
Helps governments reduce internal debt
A complicated political and economic process
Key is availability of capital
Enable foreign companies to acquire assets and gain access to markets through acquisition

37. Transition to a Market Economy
Most command economies are undergoing transition to market economies
Transition a result of the failure of central planning
Transition implies:
liberalizing economic activity, prices, and market operations
developing indirect, market-oriented instruments for macroeconomic stabilization
achieving effective enterprise management and economic efficiency
imposing hard budget constraints
establishing an institutional and legal framework to secure property rights, the rule of law, and transparent market-entry regulations

38. Obstacles to Transition
Capital
shortage
Lack of
managerial
expertise
Environmental
degradation
Cultural
differences